BJ’s Wholesale Club Holdings Analysis

Business Model Overview:

• BJ’s operates warehouse clubs in the United States, focusing primarily on the East Coast.
• Similar to Costco, BJ’s relies on customers’ club memberships for access to discounted items.
• While smaller in scale compared to Costco, BJ’s emphasizes a broader assortment, smaller pack sizes, convenient locations, and full-service delis in stores.

Financial Performance:

• Revenue CAGR from FY2015 to Q3/FY2023 is 6.0%, driven partially by food inflation and store count expansion.
• Slower growth compared to Costco, but BJ’s has a stronger margin trajectory, with a trailing operating margin of 4.0% (slightly higher than Costco’s).
• Margin improvement is attributed to factors like higher membership renewal rates and increased store efficiency.

Valuation:

• BJ’s stock trades at a lower valuation compared to competitors like Costco and Walmart (owner of Sam’s Club).
• Trailing GAAP P/E of 19.2, significantly lower than Costco’s 50.3 and Walmart’s 30.6.
• Forward cash flow multiples also show a discount compared to Costco, indicating potential undervaluation.

DCF Model and Upside Potential:

• DCF model estimates BJ’s fair value at $93.48, around 31% above the current stock price.
• Assumptions include a revenue CAGR of 3.3% from FY2022 to FY2032 and a gradual margin improvement.
• The low WACC suggests upside potential, despite modest long-term growth expectations.

Conclusion:

• BJ’s operates a successful warehouse club business with a focus on the East Coast.
• Despite slower growth compared to Costco, BJ’s financial performance is solid, with margins exceeding competitors’.
• Valuation metrics indicate potential undervaluation, presenting a buying opportunity.
• The DCF model supports a buy rating, considering the upside potential relative to the current stock price.

Overall, BJ’s Wholesale Club Holdings appears to be a promising investment opportunity based on its robust financials, favorable valuation, and potential for future growth.